2-11 Notes BF - percent every period o Supernormal growth...

2/11/08 Business Finance Notes • Cash flows for Stockholders o If you buy a share of stock, you can receive cash in two ways  The company pays dividends  You sell your shares, either to another investor in the market or back to the company o As with bonds, the price of the stock is the present value of these expected cash flows. • Developing the model o You could continue to push back the year in which you will sell the stock • Estimating Dividends: Special Cases o Constant dividend  The firm will pay a constant dividend forever  This is like preferred stock  The price is computed using the perpetuity formula o Constant growth dividend  The firm will increase the dividend by a constant

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